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all right well i wasn't going to make this video i got all these messages people said to me will you talk about gamestop and i thought everyone's spoken about gamestop and more people said tell me about gamestop explain the game stop story and i just thought nah there's 100 videos on this not gonna do it but anyhow i i taught my first class at the university today and the students all said to me patrick tell me about gamestop and i thought i'll make a video on gamestop so i guess to talk about gamestop we have to start with wall street bets who are wall street bets if you don't know they're a group on reddit they've been all over the news for i don't know most of the pandemic for piling into stocks that's what they do and wall street bets they're basically a group of people they're on reddit they talk about stocks or stonks and they they pile into them and they don't they don't like to buy the stocks they like to buy the options they're they're my kind of person they try to trade the options you know but anyhow they like gamestop and you might ask why why do they like gamestop or even what is game stuff of course you've read the news you you probably know what gamestop is but gamestop is a store in the united states it's a retail store that sells mostly used video games and the redditors they like video games the wall street bets boys they play the video games and so they like gamestop because they like video games and in particular they like secondhand video games now a lot of people don't like um they don't like gamestop and the reason they don't like gamestop is it's it's not necessarily the best it's not the best investment opportunity necessarily at the moment and the reason for that is is quite simply that it's it's a retail store and retail has been hammered during the pandemic they're selling second-hand video games and the video games companies have started to move towards downloads you know you can download video games now you don't necessarily get a dvd anymore and so the the second hand uh video game market might be disappearing but the wall street bench boys don't care and so they like gamestop and they they bought some calls so what's happened why did they why did they decide to buy the calls and why is it a big deal well they they noticed that there's an awful lot of shorts out there there's actually a greater than 100 short position in gamestop stock and a lot of people have said to me patrick how can there be greater than 100 short position well it doesn't happen very much in markets but it can happen and the way it works is this if you own stock you can hold it at your broker and you can lend out that stock and your broker will pay you something to lend out that stock and it's lent out to short sellers okay now when you lend the stock to the short sellers the stock is transferred out of your account into the short sellers account and they then sell that stock but they have to of course at some point buy it back in order to return it to you that's how shorting works and i even put up a video probably a month ago explaining shorting and it might be worth looking at that so anyhow big short position in in in this stock but what happens how's there more than 100 of a short position well once you've lent it out you no longer actually have the stock you'll get the return of the stock because you you're essentially in something a bit like a total return swap with the person who borrowed the stock from you where you'll get paid the return of the stock and you'll also get paid some sort of fee for agreeing to lend it out to that person now that person might take the stock and they're going to sell it short so someone else will then receive that stock and that person is also able to lend out that stock right and so the stock can be lent out multiple times meaning that there can be a greater than 100 short interest so that's what's happened with game stock now a few of the big short sellers they came out and they said we don't like game stock they're not wall street bets boys uh they don't like the game stop and they sold it short and not only did they sell it short but they released reports explaining why it's a bad stock and why they they sold it short the wall street bets boys they did not like that and so they bought they bought options and when you buy options if you don't delta hedge them if you just buy call options what happens is that the person who sold you usually the investment bank who sold you those options is going to delta hedge them they're going to hedge their risk exposure to those options which involves buying the underlying stock so whenever you buy options someone sells you those options and they buy the underlying stock and of course an option position is usually a leveraged position and so they end up buying more stock than they would have if you had just bought the stock yourself in the market so all of this buying of options has puts upward pressure on the stock so where do we go from there well a lot of people now i read the financial uh financial press or i watch bit of cnbc and i see a lot of what i've described as pearl clutching of people saying isn't this awful you know that these these crazy guys on reddit are doing this this thing and it's it's squeezing these shorts positions and i i find it very difficult to care about this because i just think this is the way the market is people buy people sell people do what they're going to do but a lot of people are saying should the regulators get involved is this illegal well there are a few things that are illegal there's securities fraud and there's market manipulation that are illegal now securities fraud would involve lying about the stock you'd have to be telling lies you'd have to claim that it's a great stock uh maybe even publish false information about how good it is the wall street bet boys aren't doing that they're too busy eating chicken tenders you know they don't they don't care to publish false information they just pile into the stock is it market manipulation well market manipulation is sort of ill-defined a little bit in law and the idea of market manipulation or what market manipulation is supposed to be is trading to create a false appearance of activity in a stock and essentially tricking the public into buying so you're doing this sort of trading that's designed to make it look like there's a lot more interest in the stock than there actually is and then possibly tricking the the public into into buying it now the wall street bets boys they're not really doing that they're piling into the stock or at least piling into call options on the stock there's no false narrative being created they're they're actually quite clear about what they're doing they're piling into the stock and they're squeezing the shorts and they're using leverage to make their positions have much more impact than they might normally do it's not a pump and dump scheme right a pump and dump scheme once again you're probably you probably take a position early on you sneak into your position and then you create false rumors and maybe you phone people up and tell them that they should buy this stock or maybe maybe you even have a chat room and you you you trade the stock yourself and you tell all your followers to trade it and while they're buying you're selling wall street bets boys they're not really doing that either they're piling in they're piling into options and those options will eventually expire and they'll either be up or down on that trade now that's u.s regulation in the uk regulations a little bit different they have this term market abused fca you can get in trouble for market abuse could this be market abuse i mean it kind of could but once again it's because it's sort of an ill-defined term and it's it's essentially anything that the fca don't think that you should be doing but i would argue that people can do what they want with their money right you can you can buy what you want and the wall street bets boys they're not really claiming to be doing anything other than gambling they're not claiming to be making prudent investment decisions they're not you know putting away money for their retirement accounts they're they're gambling on stocks you know all the sports are closed down because the pandemic they have to have a bit of fun this is how they're having fun and you're allowed to do that you know it's your money you can do what you want if you make money on it happy days if you lose money you know it's your own money to lose and you know you go to a casino you can do that why can't you do it here in in gamestop so while the price of uh while the price of gamestop may not necessarily reflect the uh you know the the future expected cash flows of the stock in the way that people like to talk about stocks uh it does certainly reflect supply and demand there's an awful lot of demand and not an awful lot of supply and so the stock price has run way up now in the world of derivatives one of the things that's interesting from a derivatives perspective is that you know with an awful lot of derivatives theory pricing theory the idea is that you price an option or a derivative off of the underlying stock that the price of the underlying is supposed to drive the price of the derivative but that's not really the case and it hasn't been the case for a long time i mean an awful lot of option traders options traders in general will take the implied volatility from a volatility swap and use that to price an option on an index for example so well one derivative is deriving the price of another derivative which is driving the price of the underlying that's the world that we live in derivatives have just gotten big um so what's in this morning's news well melvin capital and citroen two big hedge funds who had positions in this have covered their shorts apparently they've announced that they've covered their shirts and and they probably have because it would probably be illegal for them to announce that if they hadn't once again i don't know i'm not a lawyer i'm not not an expert on on securities regulation i i another interesting idea in here that i think is that there's there's this concept of how markets work the principle of ever changing cycles and it's essentially that when something works for a while eventually it stops working and for a long time a lot of these firms some of the big short sellers have had this approach where they take a short position in the stock and then they publish sort of a research report explaining why it's a terrible stock they publish that and then that is supposed to sort of knock down the prices the rest of the market realizes that this short seller is correct and that that's a thing that some of these guys have done in the past and now it has changed where actually having a huge short position makes you a target of you know possibly the wall street bets boys and it's kind of smart at them frankly to target these huge short positions because these people are sort of forced buyers and the more it moves up the more they lose but but it's kind of an inverse leverage position and thus you can lose more than your initial capital when you short a stock and i i explained that in my earlier video about shorting but anyhow um so historically the hedge funds or some of these firms have gotten away with this idea of publishing a bad report about a stock and then that causes it to fall and they make money and now all of a sudden it has changed that they possibly have to keep quiet about their short position because they don't want to get hammered by small traders who all pile in together now back to the sort of regulation question like you know there are of course regulations against a coordinated attack on on a given stock but how coordinated is it it's just a bunch of people on the internet saying haha this is funny let's do this no one has to do they're not that coordinated they're not sort of a a group that have entered a you know an agreement to do a specific thing they can do it or not if they don't want to and it's a whole bunch of small positions and if the sec were to go after them who do they go after all of them anyone who bought an option on on their stock it's uh it's not obvious to me um an interesting story i guess relating to this matt levine on bloomberg wrote a good piece yesterday on the topic and uh he in it he told the story of harbinger capital and and a rather similar sort of short short trading story where phil falcone the the fund manager at harbinger owned an awful lot of bonds uh in a company called max m a double x and he realized that the broker was short them and the broker was also encouraging uh other customers to short it now i think he started out with around 75 percent of the float so he owned about 75 percent of the bonds he heard this it annoyed him so he just started buying up and he bought all of the other bonds and then he agreed to lend some of his bonds and two shorts and so the shorts borrowed those bonds and sold them short and then he took them all out of circulation he he called back the short you know at one point i guess the the the bank was on the broker was on the phone to him and after he had stopped landing and they said you know what are we supposed to do in order to buy back these bonds there's none of them out there what's your suggestion and he he replied just keep bidding sometimes you're just on the wrong side of a trade now of course he did get in trouble the sec did bring charges against him for that so that's maybe not right when you control the entire float but when a whole bunch of people are doing a thing that they want to do with their own money it's hard to say if it's illegal or not but it doesn't necessarily appear to be so anyhow that is my take on um on the gamestop um and the wall street bets boys see you guys later bye [Music]